While companies like Portland, Ore.-based U.S. Bancorp and Idaho-based West One Bancorp. have attractive franchises, Mr. Tejera says the premiums they might fetch have been diminished by a provision in the interstate act that discriminates against large in-market buyouts.

Under the law, no bank can exceed 30% of a state's deposit share unless it is a new entrant. Mr. Tejera, who works in the Seattle office of the Minneapolis firm, figures this hurts already-large franchises such as KeyCorp. who could afford to pay higher premiums because of potential savings.

"Your ability to enhance earnings stream through cost-cutting has been reduced," the 37-year-old analyst said. "It changes the price dynamic for shareholders."

During the interview, Mr. Tejera discussed his view of the major West Coast banks and the coming consolidation of fragmented markets from Colorado to Northern California. Here are his picks and pans for the region:

Q.: Who's at the top of your buy list?

TEJERA: We are looking at a couple of the thrifts that are really consumer banks in sheep's clothing. In my neck of the woods, Washington Mutual [Savings Bank] is probably the largest of the stocks we're recommending. We also like Sterling Financial Corp., a Spokane, Wash.-based thrift that is putting up some phenominal growth rates in nontraditional thrift lending.

Q.: What sets them apart?

TEJERA: Virtually every traditional thrift, and we follow 28 of them, is a "hold" right now with the exception of these. They have said this is not a long-term, 20th century business. They look at this business and they say, what do we really have? They have a bunch of customers who love them. Now, they say, let's figure out a way to sell them products.

Q.: What about WAMU specifically?

TEJERA: Washington Mutual has gone aggressively after the checking account. It is in a position to do that because it has about 250 locations, including in-store branches which are a very low-cost entry vehicle. In addition to the checking accounts, Washington Mutual bought a broker dealer with a mutual fund complex back in 1983.

So, not only is it offering mutual funds, it is also enjoying the vertical margins on that business because of that complex. It is offering equity participation in a half-dozen indexed funds that it offers customers and that is where that business is headed.

It is also one of only two thrifts I am aware of that owns a life insurance company -- WM Life. It has about $750 million of contracts and 70% of the people who buy that insurance also have another relationship with the bank. It is very much a model for the future.

Q.: Earlier this year, Washington Mutual took a hit to realign its portfolio. Some saw that as leaving the company vulnerable to takeover. Is that a realistic possibility?

TEJERA: It's not. But I know for a fact that there are big players that are still interested in significant market-share participation in the Pacific Northwest, and Washington Mutual is one of the two large franchises left that you can acquire. However, this company has clearly demonstrated that it is a buyer and not a seller.

Q.: Tell me about Sterling.

TEJERA: Sterling has about $1.5 billion in assets and 41 branches. It has a strong mortgage banking operation, and is one of the top 10 originators in Washington. That is not really the promising part. Sterling offers about 25 different flavors of the second mortgage. You can do an RV loan or you can do a car loan that is a second mortgage.

Instead of getting 275 basis-point margins on the product, it gets 400 to 415 basis-point margin and experiences a 10 basis-point increase in your chargeoffs. Sterling is seeing about 40% growth rates in that market.

Q.: What are Sterling's long-term prospects?

TEJERA: Sterling is a very nice piece for a number of folks that would like to be in eastern Washington or be larger in the region. Names like West One Bancorp., First Security Corp. or KeyBank [a unit of KeyCorp] come to mind as players who would like to grow in the market. WAMU would look at them too.

Q.: We haven't talked about U.S. Bancorp. What is your view of that franchise?

TEJERA: We're not recommending the stock. Frankly, they have really fumbled the ball. U.S. Bancorp had as much momentum going into the 1990s as any financial institution. In fact, in 1990 I think it added more aggregate market value than any bank in the country, save two.

The stock was up 60-some% and the bank had one of the hottest economies in the country by the tail and the whole thing unraveled. U.S. Bancorp could have been the Pacific Northwest-Intermountain super-regional.

Q.: So, what happened?

TEJERA: Where it ultimately broke down was that their acquisitions didn't pay. U.S. Bancorp didn't overprice these deals. I think it was in the subsequent integration that they really fumbled the ball. Bank officials then said they were going to build some businesses that stretched outside the region. I think they tried to do too much and they got overextended. Those business had too long of a payback period and too many of them.

Q.: What's the outlook?

TEJERA: The fundamentals are still very soft at the company. Earnings will be up but they will be low quality. The bank will have reduced credit costs and reduced an already too-high overhead and the revenue line will be very, very soft. So, there's not really a fundamentals story developing there.

The real story is who does the bank fit in with strategically. The three names that come to mind is Norwest Corp., Wells Fargo & Co. and KeyBank. Wells and Norwest are notorious cheap-skates. And the U.S. Bank has a very full price in mind.

Q.: What is it worth?

TEJERA: I think it is a classic two-times-book deal. There hasn't been a lot of growth in book, but it's in the high $15 range. The rumor around town is that they want $40-a-share. I would be shocked if anyone paid that -- and I would immediately short the stock of whoever agreed to pay that.

Q.: How will interstate banking affect mergers in the Northwest?

TEJERA: You may not find this in too many other places, but the new interstate banking law's deposit ceiling really alters the M & A puzzle here. I think four of the seven banks that have in excess of 30% of the market are in the Northwest.

In Oregon, U.S. Bank has in excess of 33% of all deposits. West One has a similar percent in Idaho. There is First Security in Utah and National Bancorp of Alaska has about 40% there. That alters the equation.

Q.: How?

TEJERA: The biggest loser in the Northwest is KeyCorp. Key could have been arguably a buyer for all of them, but Key has to seriously alter its strategy because it would clearly bump the ceilings. Frankly, before that law, the company that could pay the most for U.S. Bank was KeyCorp. because they have all the duplicate distribution in both Washington State and in Oregon that could have been eliminated.

Q.: So the new law has changed the economics of big mergers.

TEJERA: Your ability to enhance the earnings stream through cost-cutting has been reduced. The law changes the price dynamic for shareholders and it eliminates some of the very high-priced deals like M&I and Valley in Wisconsin which went out at 260% [of book] because of all the overlaps you can eliminate. That doesn't mean the banks won't be bought, though.

Q.: How have BankAmerica and First Interstate Bancorp. been doing in the Northwest?

TEJERA: Seafirst [BofA's unit] has been awesome. It is the 800-pound gorilla. The bank got a jump on the whole consumer banking movement by being five years ahead of the industry. It completely reengineered because officials decided the bank was not going to grow, so they had to make as much money as possible off the existing customer base. Seafirst is hugely profitable with 1.7%, 1.8% ROAs, which I believe are understated.

As well as Seafirst is doing in Washington, it is not cutting the mustard in Oregon. That has not come together for the bank and it remains part of the $25 billion in thrift acquisitions that essentially continue to break even for the company. I think that's an overstated break-even.

The bank has been funneling loans-out of California and Washington and warehousing them in those states. The bank is probably losing money [in Oregon], that would be my guess.

Q.: What about First Interstate?

TEJERA: Interstate has been very, very quiet. Up until about six months ago it had been milking the franchise here in Washington State and Oregon to fund problems elsewhere. The bank has now become more aggressive and is building share of market. I'm glad to see First Interstate is being proactive about building the franchise again, but the strategy is going over my head. The bank has paid some phenomenal prices and had clearly indicated it is going to have high runoff rates. If this is a piece to some other puzzle that I am not aware of, it might change the equation.

Q.: Let's talk about some of your other picks in the West.

TEJERA: We like a number of Rocky Mountain community banks that are enjoying very strong economies and acting as consolidators in what used to be a unit-banking environment.

There is an Albuquerque-based First State Bank of Taos, the only publicly traded bank in New Mexico. The state is enjoying cyclical growth. It has a very fragmented market. It is consolidating a lot of the $30 million to $40 million [asset-sized] community banks and getting very good returns in the process.

In Colorado, there is one of the most profitable banks you will ever find called Mountain Parks Financial [unit of Mountain Parks Financial Corp., Minneapolis]. It operates in communities on the fringe of the Denver area and in some of the ski communities. It has 700 basis-point margins with a 2.5% ROA and a 31% ROE, and has grown through 11 acquisitions.

There are still 231 independent banks in Colorado. We like a company called Vectra Banking Corp. in the Denver-Boulder market. It is a $400 million shop with 10 branches. The fellow who runs that is Gary Judd, a Citicorp alumnus. He has bought eight banks in the last five years.

Q.: What about Northern California?

TEJERA: There are several banks operating in the strata below the big three and they are doing the same thing as in Colorado -- consolidating the market. We like Westamerica Bancorp. out of San Raphael, which is a $2 billion shop.

Q.: It seems that you are more optimistic about smaller deals than you are about major ones.

TEJERA: I'm becoming intrigued with the size dynamics of these transactions. If you're a U.S. Bancorp wanting a premium price, [you have to realize that] it is very hard to buy a $20 billion bank and pay a premium for it. It doesn't matter who you are. If you want to maximize shareholder value you should probably hook up with whomever the most synergies are available. That is a slow gratification, rather than the better-than-sex, big-premium kind of deal announced.

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